The Independent Producers and the Paramount Case, 1938-1949

Part 6: The Supreme Court Verdict That Brought an End to the Hollywood
Studio System, 1948

The Supreme Court Trial

When the Paramount case made it to Supreme Court trial on February 9, 1948 it
had bee nearly a full year after the government appealed the Statutory Court
ruling.

Attorney General Tom C. Clark opened the government arguments, confident that
the wealth of information would prove that divorcement was necessary to end
studio domination of the motion picture industry. The counsel said that of the
92 U.S. cities with a population of 100,000 or greater, the studio-owned theater
chains held domination over all but four. Over one-third of the cities had no
independent theaters at all.

For the major studios, the legal defense included several heavy-hitters,
including former Secretary of State James F. Byrnes and 1924 Democratic
Presidential candidate John W. Davis. Again, the primary argument was that the Paramount
case, which would bring an end to the studio system, would cause a disservice to
the public.

The Decision

The case was rapidly tried, and the ruling was handed down by the Supreme
Court on May 4, 1948. The decision favored the independent producers on
practically every point. The Supreme Court affirmed the Statutory ruling that
declared the studios guilty of violating antitrust laws. Once and for all the
Supreme Court abolished block booking-ending over 30 years of controversy-by
requiring all films henceforth to be sold on an individual basis.

Also the Supreme Court reversed the lower court mandate for competitive
bidding, and stated that such an involved legal restriction would involve the
government too deeply in the day-to-day business of the industry. Disagreeing
with the Statutory decision, the new ruling considered studio disintegration to
be the ultimate solution to the problems faced by the independents. The Supreme
Court remanded the decision back to the lower courts with the recommendation
that competitive bidding be nullified and that divorcement be reconsidered.

The independent producers’ years of struggle finally resulted in a Supreme
Court ruling in favor of theater divestiture from the major studios and the end
of block booking. A SIMPP statement released by Gunther
Lessing of Walt Disney Productions called the decision a “declaration of
independence as far as independent motion picture producers are concerned.”
Samuel Goldwyn called the decision “a distinct victory toward restoring free
enterprise in the motion-picture industry.”

But skeptics considered the ten-year-old fight far from over. The case was
sent back to the Federal District Court for the final ruling, in what seemed to
many as a never-ending postponement of the divorcement decree sought by the
government. For instance, Joseph Schenck interpreted the Supreme Court ruling in
more vague terms, indicating that the high court never actually condemned
theater ownership by the studios, but instead had sent the case back to court.
“I think the ruling means the end of the divestiture threat,” Schenck
declared, in far more optimistic terms than the grim outlook would indicate.

SIMPP Averts Studio Compromise

The delay also gave the major studios time to counteract the Supreme Court
decision with an attempt at another consent decree. Throughout that summer, the
press reported activities of the Big Five trying to enact a compromise deal with
the Justice Department. In 1948 however, the studios had to deal with something
that was not around during the 1940 compromise: a united independent producer
movement, which stood in opposition to any unfavorable deal, and was willing to
take the case to the people when the studios tried to protect their monopoly.

SIMPP sent a telegram of protest
to Attorney General Clark, which Gunther R.
Lessing also forwarded to President Truman on September 10, 1948 and then
disclosed it to the press the following week. Lessing, who signed the telegram
and probably wrote it himself, was acting as vice president and chairman of the
SIMPP executive committee.

SIMPP feared that another secret negotiation would lead to a devastating
compromise, as had happened in 1940 when an antitrust misstep resulted in years
of delay. The government, which had first-hand experience with the shiftiness of
the Hollywood studios, agreed with SIMPP, and planned the negotiations around
the recent Supreme Court victory.

On October 1 the Justice Department sent notice to the attorneys of the Big
Five that the government would indeed encourage a consent decree from any
company that wished to opt out of the trial, so long as the corporation agreed
to a divorcement decree that separated exhibition from production-distribution.
The Hollywood majors remained aloof, and they resolved to go back to court to
fight divorcement to the end.

“Opinion in trade circles,” the New York Times reported, “was
that the case was back to its beginning in July 1938, since divorcement was the
crux of the Government’s action. However, it was felt that the Supreme
Court’s dissatisfaction with these particulars tended to strengthen the stand
of the Justice Department.” Industry analysts said that it looked as if real
change was still uncertain, and perhaps still a long ways away. Then in October
1948 a remarkable turn of events brought the beginning of the end of Hollywood
vertical integration.

Howard
Hughes wielding arbitrary power as head of RKO.

The First Studio Is Dissolved

Howard Hughes, the independent producer -
turned - movie - czar, announced that RKO would immediately
comply with the Supreme Court decision by spinning off its theater chain from
the studio operations. The move typified his spontaneous behavior, and
reverberated from his independent roots as a enemy of the studio establishment.
Hughes also had much to gain by forcing a divorcement decree. RKO, by far the
weakest of the Hollywood theater owners, would be brought on equal ground if
divestiture was successfully enacted across the industry.

Hughes’ decision to break ranks with the other major theater owners was one
of the singular events in the antitrust case, leading the way for the
disintegration of the vertical Hollywood majors. RKO promised divorcement within
one year, creating two companies for Hughes to choose one to keep a controlling
interest in. With obvious plans to remain a film producer, Hughes kept the RKO
Pictures Corporation and sold the RKO Theatres Corporation. The RKO consent
decree was signed on November 8, 1948, signaling the finale of the studio epoch.

The Mighty Paramount Is Broken

With RKO proving the precedent for a feasible divorcement, the trial of the
remaining four theater-owning studios was set for the following April.
Anticipating a costly battle, the mighty Paramount Pictures became the second
studio to submit to the divorcement demands. The studio felt the burden on
impending legislation looming over the company fortunes, and decided to
voluntarily divest their theater chain rather than submit to a court-directed
liquidation. Paramount entered into a divorcement decree with the Justice
Department on February 25, 1949.

The other three Hollywood theater-owners resisted the Justice Department
demands. “We will not give up our theaters without a court fight,” Harry M.
Warner announced within a few hours of the Paramount capitulation of February
25, 1949. “We have taken years to accumulate the company assets we have, and
we will fight to hold them.” Celebrating the twenty-fifth anniversary of the
formation of Metro-Goldwyn-Mayer, Loew’s told its stockholders that the
company bitterly opposed theater divestiture. The Loew’s circuit refused to
sell off MGM, and reminded the Department of Justice that the Supreme Court may
have outlawed block booking, but it never declared vertical integration illegal
per se. Twentieth Century-Fox also protested disintegration. It offered to
eliminate some of its more notorious regional exhibition monopolies, if the
attorney general would regulate but not force the studio to sell its entire
chain. The government rebuffed all proposals, and agreed to see the studios back
in court where, by this time, divorcement was virtually assured. The decisive
blow came with the Federal Statutory Court decision on July 25, 1949-eleven
years and one week after the Paramount case was filed.

Though the Society of Independent Motion Picture Producers reached a plateau
with the decision in the Paramount suit, the Society considered the case
as one step toward their ultimate goal of complete freedom of the screen. As Sam
Goldwyn cautioned, “it will be necessary to see that divorcement means more
than just a transfer of circuit control from one set of hands to another.”
SIMPP decided to continue the battle against select movie companies in private
suits to see that predatory practices were stopped, and, in some cases, damages
collected. They were also positioning themselves to fill the void left by the
studio system. When Paramount, for years the scourge of the independent
producers, finally broke up its vertical monopoly, the producers found
themselves in agreement with Paramount’s Barney Balaban who said “this
consent decree marks the end of the old, and the beginning of the new.”